Recently, the story of Elon Musk criticized Warren Buffett for not knowing anything about cryptocurrencies when this Omaha investment legend said that Bitcoin has no value and no matter how much the price increases, he will not buy it.
While the controversy over the role of Bitcoin is tense, the first country to recognize Bitcoin as legal currency in transactions is on the verge of default.
Specifically, President Nayib Bukele of El Salvador, instead of borrowing money from the International Monetary Fund as well as famous financial institutions and banks, tried to offer bonds issued in Bitcoin in exchange for 1 billion USD capital source. However, 5 months have passed without a single investor interested while the country has to pay interest on maturing $ 800 million of old debt in early 2023.
El Salvador’s bonds fall in price similar to those of countries in military conflict
Worse, the IMF refused to provide new loans to El Salvador due to concerns about the negative effects of the recognition of Bitcoin as legal currency, which would affect the economy as well as the transparency of the financial system. main.
In fact, after a period of excitement over the legalization of cryptocurrencies, El Salvador is facing the risk of near default because investors as well as large financial institutions refuse to take the risk of accepting the idea. this idea.
In April 2022, the price of outstanding bonds of El Salvador fell by 15.1%, which is only inferior to Ukrainian bonds in recent times in terms of record devaluation. El Salvador’s 2032 maturity bond is currently being offered for sale with a yield of up to 24%, but no one dares to buy it.
According to Bloomberg news, investors are refusing to buy this national bond because they are preparing for the prospect of El Salvador defaulting as they recklessly accept cryptocurrencies.
The price of receiving Bitcoin
In 2021, El Salvador refused to continue negotiating with the IMF for new loans, and at the same time accepted the use of cryptocurrencies. However, the move prompted investors to abandon El Salvador shares, worried about the country’s illiquidity as well as the government’s arbitrariness in the matter of cryptocurrencies.
Currently, the outstanding bond price of Al Salvador has dropped to as low as 78 cents, thereby showing the impatience of international investors.
El Salvador’s bonds are seriously depreciating
“If President Bukele can’t raise capital through the traditional international credit channel, how can they repay the old debt?”, Jared Lou, director of William Blair Investment, criticized.
Although the mobilization of bonds with Bitcoin is not necessarily used to pay off the old debt due in January 2023, if successful, it will create a springboard for Al Salvador to continue borrowing for the future, and open up New era for cryptocurrencies.
According to the plan, Al Salvador intends to attract fans to come here to create a “Bitcoin City” (Bitcoin City), where cryptocurrency mining is performed using thermal energy from a nearby volcano.
However, the IMF opposes these plans because they pose too high a risk to the financial system. Normally the IMF would be the last option for countries to borrow money, but it was this organization that had to postpone negotiations with El Salvador to review the risks of the decision to accept cryptocurrencies.
In February 2022, Fitch agency downgraded El Salvador’s credit rating to “CCC” on the grounds that the economy is too dependent on short-term loans, has limited financial resources, and has a heavy burden of debt. Public debt is expected to reach 87% of GDP this year.
Worse, the fact that the US Federal Reserve (FED) raised interest rates further made it difficult for El Salvadorans due to the high cost of importing necessities, food, and energy.